Stock rally on RBI’s status quo

The BSE Sensex closed 1,016.03 points or 1.76% higher at 58,649.68 and the National Stock Exchange’s Nifty rose 1.71% to 17,469.75.

According to Deepak Jasani, Head of Retail Research, HDFC Securities, the monetary policy turned out to be more sluggish than expected. “The focus of the committee is clearly on supporting growth through adequate liquidity and low interest rates, despite rising inflation, global changes in interest rate policy and road fears over higher commodity prices. RBI can, of course, fix surplus liquidity to manage rates depending on the evolving situation,” he said.

RBI retained its accommodative stance leaving key interest rates unchanged. The central bank also maintained its growth and inflation projections.

Experts said the RBI’s stance points to a long and gradual road towards policy normalisation. “The priority of the Monetary Policy Committee (MPC) is to secure the growth impulses and preserve the policy room to meet this objective, which is at odds with global policy shifts, particularly the US Federal Reserve. Even when the risks of inflation were highlighted by imported pressures and volatility in food, ‘flexibility’ in the price stability mandate would guide policy along the recovery path. “The proposed normalization plan was little through,” said Radhika Rao, senior economist at DBS.

While Arun Srinivasan, senior executive vice president, investment at ICICI Prudential Life Insurance Company Ltd, said while the overall policy is in line with expectations, it was the right time for the RBI to bite the bullet on reverse repo growth. “The market had largely priced the reverse repo hike in this policy and hence, it would have absorbed the move quite easily. While RBI’s overarching priority still seems to be reviving growth, inflation will be the biggest concern in our view.”

There is growing consensus that the RBI may have delayed rate hikes due to omicron risk, but policy normalization is due next year. Morgan Stanley expects the RBI to initiate policy normalization at its next meeting in February with a hike in the reverse repo rate to shrink the policy rate corridor. “However, we expect the lift-off and its quantum to be dependent on the impact of Omicron on economic activity. If the growth momentum remains sustainable, the RBI may hike the reverse repo rate by 40 basis points (bps) to adjust the policy rate corridor in one go.

The bond market’s reaction was limited, with short-term rates largely unchanged, while the 10-year benchmark G-sec yield declined 2-3 bps to 6.36% in an early reaction to the RBI’s policy.